UK supermarkets are a bit like the beer they used to sell; bland and
too many of them. Tesco however is working on that one as it culls its
less profitable sites and brands (including the #4 UK brand, Carlsberg)
to restore its growth and margin metrics, even it means from a lower
base of revenues and margins. Tesco's interim results released yesterday
therefore reflect this dynamic of what was a slight deterioration in
actual UK sales growth in Q2 to -0.9% YoY vs the -0.4% posted for Q1,
but having eliminated the weaker perfomers from the average meant that
the Q2 like for like sales in the UK surged from -1.3% to -1.0%, to take
the first half average to -1.1%. While a considerable improvement on
the prior trajectory, it was not without cost, with UK & RoI
operating profits collapsing by 69% (-£377m) to only £166m and a margin
down -200bps to only 0.9%. Given the profit decline of -£377m
substantially exceeded the underlying revenue decline of -£226m and that
the group had taken around £6.8bn of provisions last year to help pad
out the bottom line this is a pretty remarkable performance. Either
management is keeping its powder dry for the great cost led margin
rebound just ahead of their option vestings in 2-3 year time or the
apparent stabilisation in top line sales was expensively purchased out
of gross margins. While this may keep some pressure off the new
management, this is no substitute for a sustainable recovery,
particularly when the share price is still reaching out to well above
even where consensus forecasts are anticipating in FY17.
With
underlying organic sales growth still negative and the shares trading
on a current year prospective operating FCF yield of possibly under 3%
markets are clearly reaching out into a future where a restoration in
operating margins and possibly also near market average growth rating
may also be in prospect. If one were to take a fairy upbeat assessment
that the group ought to be able to justify an underlying growth rating
of around +4% pa (and circa 7% Op FCF yield), then we estimate that the
group needs to convince markets of its capacity to restore operating
margins to near peak levels of around 5%, or to over +50% above where
consensus estimates are currently for FY17. We may be through the
trough, but is the pace of improvement currently being delivered by
either Tesco or its competitors really enough to take us to these
valuation highlands within a credible investment horizon? At this stage,
the group needs to a capacity for some serious over-delivery rather
than merely tracking existing expectations.
Perhaps the successful Mail Online should stick to celebrity gossip as its foray into serious issues seems prone to schlock.
While lacking the pithy wit of a News of the World headline, the Mail
Online’s recent article on China’s alleged mistreatment of Falun Gong
certainly pulled few punches with its title:
“Thousands of religious prisoners in China had their livers,
kidneys and corneas ripped out while they were ALIVE to sell to
‘transplant tourists’, claims new film”
http://www.dailymail.co.uk/news/article-3257383/Thousands-religious-prisoners-China-livers-kidneys-corneas-ripped-ALIVE-sell-transplant-tourists-claims-new-film.html#ixzz3nUwZKrMT
On first reading, the article seemed be a one-side puff piece
promoting and anti-Chinese film with its “most compelling testimony”
coming from a doctor, who just happens to be a Uyghur. Was there no
balance to be had? Are the Chinese authorities that evil and when is the
computer game out?
But “STOP THE PRESS!”
….the article does have balance, although you have to be able to read Chinese to get it.
In one of its pictures (below) the articles shows the groundswell of
support for Falun Gung in Hong Kong from some clearly hardened radicals –
well mainly little old ladies. Read what is actually written on the
banners however and you’ll see that they are saying quite the opposite
to what the Mail Online’s caption purports. Far from them “appealing for
recognition for the Falun Gong’s plight” as claimed by the article, the
banners are actually urging people to distance themselves from the evil
religion of Fallun Gong (the black script) with the scripts in red
making various complaints against the sect including accusing it of
attacking China and attempting to de-stabilise Hong Kong by aligning it
with foreign powers.
Somehow, I don’t see the Mail Online as being big on irony so either
this was a simple cock-up by the picture editor who can’t read Chinese
and the editor who didn’t think to check ( – come on Chinese is not
exactly a minority language) or was selected by someone who knew exactly
what is being said on the banners in the picture and maybe disagreed
with the political narrative of the article.
Either way it’s all rather reminiscent of when the media was showing
us fake pictures of Russian tanks supposedly invading Ukraine when in
fact they were stock photos taken in Chechnya a few years before.
Well done guys, best stick to articles about the size of Kardashian’s booty.